Fitch Rates J.P. Morgan Mortgage Trust 2015-IVR2
--\\$250,000,000 class A-1 certificates 'AAAsf'; Outlook Stable;
--\\$66,570,000 class A-2 exchangeable certificates 'AAAsf'; Outlook Stable;
--\\$66,570,000 class A-3 exchangeable certificates 'AAAsf'; Outlook Stable;
--\\$66,570,000 class A-4 certificates 'AAAsf'; Outlook Stable;
--\\$31,657,000 class A-5 certificates 'AAsf'; Outlook Stable;
--\\$66,570,000 class A-X-1 notional certificates 'AAAsf'; Outlook Stable;
--\\$66,570,000 class A-X-2 notional certificates 'AAAsf'; Outlook Stable;
--\\$66,570,000 class A-X-3 exchangeable notional certificates 'AAAsf'; Outlook Stable;
--\\$1,676,000 class B-1 certificates 'AAsf'; Outlook Stable;
--\\$8,753,000 class B-2 certificates 'Asf'; Outlook Stable;
--\\$6,145,000 class B-3 certificates 'BBBsf'; Outlook Stable;
--\\$2,793,000 class B-4 certificates 'BBsf'; Outlook Stable.
The 'AAAsf' rating on the senior certificates reflects the 15.00% subordination provided by the 8.50% class A-5, 0.45% class B-1, 2.35% class B-2, 1.65% class B-3, 0.75% class B-4 and 1.30% class B-5. Fitch will not rate the \\$4,842,209 class B-5 certificates.
Fitch's ratings reflect the high quality of the underlying collateral, the clear capital structure and the high percentage of loans reviewed by third-party due diligence companies. In addition, Wells Fargo Bank, N.A. will act as the master servicer and U.S. Bank Trust, N.A. will act as the trustee for the transaction. For federal income tax purposes, elections will be made to treat the trust as one or more real estate mortgage investment conduits (REMICs).
This transaction includes the use of Pentalpha Surveillance LLC (Pentalpha) as representation & warranties (R&W) breach reviewer for the benefit of the trust. The securities administrator will instruct Pentalpha to review any loan that satisfies the review trigger. Pentalpha will review the loan using the breach determination review procedures outlined in the transaction documents to identify failures with respect to one or more of the breach determination procedures. If a failure exists, Pentalpha will determine whether or not the failure is material, based on materiality conditions outlined in the transaction documents. Pentalpha will then provide the final results of its review and determination to the securities administrator.
JPMMT 2015-IVR2 will be J.P. Morgan Mortgage Acquisition Corp.'s second transaction of prime residential mortgages in 2015. The certificates are supported by a pool of prime seven-year hybrid adjustable-rate mortgage (ARM) loans. Approximately 39% of the pool has a 10-year interest-only (IO) period. The entire pool was originated by First Republic Bank (FRB).
As of the cut-off date, the aggregate pool consisted of 382 loans with a total balance of \\$372,436,209; an average balance of \\$974,964; a weighted average original combined loan-to-value ratio (CLTV) of 66.5%, and a weighted average coupon (WAC) of 3.1%. Rate/Term and cash-out refinances account for 16.2% and 15.7% of the loans, respectively. The weighted average original FICO credit score of the pool is 758. Owner-occupied properties comprise 77.6% of the loans. The states that represent the largest geographic concentration are California (57.7%), New York (21.1%) and Massachusetts (12.9%).
KEY RATING DRIVERS
High-Quality ARMs: The collateral pool consists of seven-year hybrid ARMs to borrowers with strong credit profiles, low leverage, and substantial liquid reserves. All of the loans were originated by FRB, which Fitch considers to be an above-average originator of prime jumbo product. Third-party, loan-level due diligence was conducted on 100% of the pool with minimal findings, indicating strong underwriting controls.
Payment Shock Exposure: The pool consists entirely of ARM loans while approximately 39% also have IO features. Loan products that result in periodic changes in a borrower's payment such as ARMs and IOs expose borrowers to payment reset risk. Future rises in interest rates and payment re-amortization after the expiration of IO periods can increase monthly payments considerably. To account for this risk, Fitch applied a probability of default (PD) penalty of approximately 1.66x to the ARM loans without IO terms and 1.76x to those with IO features.
High Geographic Concentration: The pool's primary concentration risk is California, where 57.7% of the properties are located. In addition, 87.9% of the properties are located in the pool's top five metropolitan statistical areas (MSA) in California, New York, and Massachusetts. The pool has significant regional concentrations, which resulted in an additional penalty of approximately 66% to the pool's lifetime default expectation.
Small Loan-Count Risk: Transactions with a small number of loans carry the risk that portfolio performance may be negatively affected by a few assets that underperform relative to the statistically derived assumptions underlying their ratings. While total loan count in this pool is 382, the weighted average number of loans (WAN) is 266. This resulted in a 6% penalty on the PD.
Leakage from Reviewer Expenses: The trust is obligated to reimburse the breach reviewer, Pentalpha, each month for any reasonable out-of-pocket expenses incurred if the company is requested to participate in any arbitration, legal or regulatory actions, proceedings, or hearings. These expenses include Pentalpha's legal fees and other expenses incurred outside its annual fee schedule and are not subject to a cap or certificateholder approval. Furthermore, certificateholders are obligated to pay Pentalpha a termination fee of \\$140,000 to terminate the contract. While Fitch accounted for the potential additional costs by upwardly adjusting its loss estimation for the pool, Fitch views this construct as adding potentially more ratings volatility than those that do not have this type of provision.
Extraordinary Expense Adjustment: Extraordinary expenses, which include loan file review costs, arbitration expenses for enforcement of the reps, and additional fees of Pentalpha, will be taken out of available funds and not accounted for in the contractual interest owed to the bondholders. This construct can result in principal and interest shortfalls to the bonds starting from the bottom of the capital structure. To account for the risk of these noncredit events reducing subordination, Fitch adjusted its loss expectations upward by 45 basis points (bps) for the class A bonds, 40 bps for class B-1, and 30 bps for classes B-2 through B-4.
Tier 3 Representation and Warranty Framework: While the transaction benefits from JPMCB ('A+'/'F1'; Outlook Stable) and FRB ('A-'/'F1'; Outlook Stable) as representation and warranty (rep and warranty) providers for the pool, Fitch believes the value of the rep and warranty framework is diluted by the presence of qualifying and conditional language in conjunction with sunset provisions, which reduces lender breach liability. While the agency believes the high credit quality pool and clean diligence results mitigate these risks, Fitch considered the weaker framework in its analysis.
RATING SENSITIVITIES
After Fitch determines credit ratings through a rating stress scenario analysis, additional sensitivity analyses are considered. The analyses provide a defined stress sensitivity to demonstrate how the ratings would react to steeper MVDs than assumed at issuance as well as a defined sensitivity that demonstrates the stress assumptions required to reduce a rating by one full category, to non-investment grade, and to 'CCCsf'.
The defined stress sensitivity analysis focuses on determining how the ratings would react to steeper MVDs at the national level. The analysis assumes market value declines (MVDs) of 10%, 20%, and 30%, in addition to the model projected 5.8% for this pool. The analysis indicates there is some potential rating migration with higher MVDs, compared with the model projection.
Fitch also conducted defined rating sensitivities analyses which determine the stresses to MVDs that would reduce a rating by one full category, to non-investment grade, and to 'CCCsf'. For example, additional MVDs of 6%, 30% and 54% could potentially lower the 'AAAsf' rated class one rating category, to non-investment grade, and to 'CCCsf', respectively.
Fitch's stress and rating sensitivity analysis are discussed in the presale report titled 'J.P. Morgan Mortgage Trust 2015-IVR2', dated February 2015, which is available on Fitch's web site 'www.fitchratings.com'.
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